With its attendant investigation, legal actions and executive fallout, the practice of options backdating is expected to have a short shelf life.
But while options backdating may have a truncated life expectancy, its current impact is robust.
Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.
Other similar practices are being reviewed by government officials as well.
The companies backdate their options by recording the date the options were granted to a date before the options actually were granted, when the share price of the stock was lower.
As a result, if the stock price increases, the option becomes more valuable.
Similarly, the FBI has reported that it has 52 companies under criminal investigation. Department of Justice has said it will bring criminal charges where defendants falsify corporate books and records; issue false financial statements; lie to boards of directors, auditors or the SEC; or file false reports.Subsequently, the Securities and Exchange Commission (SEC) took an interest, followed by the securities plaintiffs’ bar and many corporations. The practice of options backdating, apparently widespread from 1996 through 2002, is widely believed to have been short-circuited by the enactment of Sarbanes-Oxley in 2002.Although backdating had not yet been recognized as a problem, the provisions of Sarbanes-Oxley requiring that insiders report the acquisition of securities, including options, within two days of receipt greatly hindered the ability of corporations to backdate options.Not surprisingly, the defendants themselves earned millions of dollars from backdated options.Another troublesome outcome for a corporation is that the SEC will bring civil fraud charges stemming from options backdating in all cases where criminal charges have been filed.
All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.